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A flurry of new deals points to an exciting new business possibility for Asia-Pacific banks in 2015. The immense rise of securitized products in the U.S. and European  markets was  something that seemed beyond the reach of the banks in Asia-Pacific, in the same frequency. China brought about a ray of hope. Previously, Asian securitization market saw few activities, for example, Singaporean REITs and cross-border ABS issued by Korean banks. China led to the simplification in the issuing process. With the growth in China’s onshore securitization market, the local regulators and players started believing that the securitization products would work fairly well in the re-opened market. The automobile market is slated to play a very important role in securitization, in the year 2015.

Foundation for the boom in the securitization market:

Before 2014, there were mainly domestic offerings by banks. Since 2014, the Chinese government has allowed certain Chinese subsidiaries of foreign entities to issue securitized products.  These changes by the Chinese authorities boosted the business in a very short span of time, in the then prevalent  fledgling securitization market. Because of such growth, there were numerous deals, especially in the automobile space. In the automobile market, an example of a deal that HSBC worked on last year was an RMB799 million auto ABS from Volkswagen Finance. HSBC acted as financial advisor and sub-underwriter. Thus, interest from the international investors rose considerably, because these securitization products were associated with international names. The automobile market is one of the primary drivers of the growth in securitization within China, and could be the catalyst for further business in 2015.

 

Ways in which 2015 brings about growth prospects[1]:

Increase in number of issuers and investors in the securitization market:

Since the Regulations have widened the scope of the securitization scheme; smaller banks, auto finance companies, leasing companies, and non-financial institutions are likely to join the major banks in exploring securitization as a funding option. Issuance of securitization notes are also being decided upon by the banks of China. Transactions with globally comparable structures and asset underwriting and servicing features will definitely attract international investors who are accustomed to dealing with similar issues and issuers issuing in the other markets. International investors are lured by the Chinese market to expand their investment horizon and to capitalize on the exposure that the Chinese market has.

 

Collateralised Loan Obligations (CLOs) to increase the volume of securitization:

Since corporate loans form a major part the originators’ books in China, CLO deals will still be one of the most important and widely prevalent securitization offering, for few more years to come.[2]

 

Figure 1: Chinese CLOs’ underlying assets

 

Till recent times, China Development Bank, the state-owned, non-commercial lender whose loans mainly support infrastructure projects, was the most active issuer of CLOs, primarily packaging railway construction loans. But in January, HSBC became the first foreign bank to complete a Chinese securitisation deal, selling Rmb 995bn in bonds backed by corporate loans in China’s interbank market, and retaining equity of additional Rmb 335bn in its balance sheet.

Figure 2: Chinese Securitization- Originators of CLOs

 

Increase in consumer receivables:

With the increase in consumer receivables’ securitization and lending against real estate, there would be great diversification, and it would further lead to the growth of the securitization market in China. Market trials created a foundation for them in the year 2014.

 

Enhancement of operational efficiency by self-discipline initiatives

The year 2014 saw an array of self-discipline initiatives in the securitization market. The introduction of novel processes like registration of issuance and transaction structures and co-ordination of issuance-eligibility reviews, played a great role. This exhibits the great confidence level of the regulators. In the areas of autonomous investment guidelines and independent risk analysis, self management practices are expected to increase.

 

Revolving structure to meet the increasing market demand:

The concept of revolving structure has been propagated in China, wherein the collections from the assets are supposed to be utilised for the purpose of purchase of new assets, and not to pay back the amortizing notes. Because of this concept, there would be an increase in the consumer receivables’ securitization, which could adopt this novel structure and ensure the longevity of the lives of the securitization transactions.

 

Challenges to be faced in the Chinese securitization market:

The performance of the securitized loans and receivables in China has been impressive, of late, but, it has not been tested in stressed economic conditions. If we go by the results of the other countries, it is expected that in case of a downturn, the performance of the collaterals would also degrade considerably. In case of borrowers with weak credit profiles, such cases would be very high in number. The securitization market in China is still believed to be in its nascent stage, because of which it might lack transparency, efficient price mechanisms and secondary market liquidity. With sound industry practices and stringent legal framework, fair disclosure of information, a sustainable and strong securitization market in China can be built.

 

 

 

Reported by:  Neha Somani

Dated: 20th February, 2015